Buy Corporation Bank; target of Rs 576: SKP Securities

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Buy Corporation Bank; target of Rs 576: SKP Securities

SKP Securities is bullish on Corporation Bank and has recommended buy rating on the stock with a target of Rs 576 in its February 14, 2012 research report.

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SKP Securities is bullish on Corporation Bank and has recommended buy rating on the stock with a target of Rs 576 in its February 14, 2012 research report.

"Established in 1906, the Mangalore based Corporation Bank is one of the leading premier public sector banks in India. GOI holds 58.5% and LIC of India holds 25.5% in the bank. As a corollary of having strong investor base, the bank is endowed with credibility and long term financial support. As on Q3FY12 the bank had a network of 1431 branches and 1262 ATMs."

"Corporation Bank's CASA ratio has been declining since FY08 owing to higher dependence on stable bulk deposits. We expect CASA ratio to slip to 23.0% in FY12E from 26.0% in FY11. We believe the newly setup branches should start contributing to CASA from FY13E. CASA ratio should build to 25.0% in FY13E and 27.0% FY14E. We expect skimpy 8.3% YoY growth in NII for FY12E owing to higher increase in interest expenses, as a result NIMs are expected to shrink to 1.9% in FY12E from 2.2% in FY11. Moreover, cost to income (C/I) ratio for the bank is also likely to increase owing to the robust branch expansion spree that the bank is undergoing. We expect C/I ratio of the bank to increase to 39.0%, 39.3%, 39.5% in FY12E, FY13E and FY14E respectively. Higher provisions on the other hand due to worsening asset quality is also likely to affect profitability. We expect ROAA to fall to 0.9% in FY12E from 1.1% in FY11and ROAE from 21.9% in FY11 to 19.4% in FY12E. Corporation Bank's credit grew by 28% YoY and 13% QoQ in Q3FY12. The bank expects to increase its advances portfolio by focusing towards SME, retail and priority sector lending. Corporation Bank's advances has increased by 29.4% CAGR between FY06-11, we expect a 27.2% CAGR between FY11-14E."

"At CMP the stock is trading at a P/ABV of 1.0x, 0.8x and 0.7x for FY12E, FY13E and FY14E respectively. We have valued the bank at 0.8x on FY14E ABV of Rs. 720, yielding a potential upside of 20% and recommend "Buy" rating for a target of Rs. 576 (18 months). We believe the bank's underperformance vis-à-vis bank nifty is through. The bank could have commanded a higher multiple but for declining CASA, higher C/I ratio, worsening asset quality and meager 20% free float we believe multiple of 0.8x is justifiable," says SKP Securities research report.

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To read the full report click on the attachment